INTERVIEW QUESTIONS: Société Générale, Equity Structuring, Internship

by eFinancialCareers

12 January 2013

1 minute read

Question:

What the delta of an option when it is at the money (ATM)?

Student’s Answer:

0.5

Question:

What will happen to the price of the option if there is an increase in interest rates?

Student’s Answer:

It will increase according to the RHO Greek.

Question:

What is the price of an option if the volatility tends towards infinity? And what if the expiry date tends towards infinity?

Student’s Answer:

In both case the price is equal to the underlying price. (I was not sure if these were trick questions because volatility can't be more than 100% and if it is you simply won't exercise the option in my opinion.)

We cannot guarantee the authenticity of these questions nor the accuracy of the answers: they are what one candidate claims to have been asked by HSBC and have not been verified by the bank. To visit our list of banks’ graduate interview questions in 2013, click here.

AUTHOReFinancialCareers

Insider Comment

2 comments

Pf
Pffft
14 March 2013
1. The delta of an option which is atmf (at the money forward, not spot) is close to 0.5 (not exactly, but close; how close it is depends on how high the vol is and the remaining time to expiry).
2. The price of a vanilla call option increases with a higher interest rate (because of the higher forward). However the price of a vanilla put option DECREASES with higher interest rates (take the simple example of a soick whose price is << than the strike price with little time to go for expiry. The put option price is roughly the NPV of the strike price - stock price (ignoring dividends). Hence the rho must be negative.
3. As the previous commenter mentioned, vol can be well above 100%. If it does go to inf. (which is obviously a hypothetical question), the call price will tend to the stock price (ignoring divs), but the put price (there are both kinds of options, y'know, don't focus only on call options!), by put call parity, must tend to the NPV of the strike (for a European option).
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To
TopQuant
12 March 2013
"volatility can't be more than 100%" ????
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